How Saving Money On Taxes Can Keep You Poor

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I want you to pay more taxes.  

Not because it’s your moral responsibility, or civic duty, or anything altruistic at all.  I want you to pay more because that means you’re making more.  It’s as simple as that.

Ok.  So it isn’t as simple as that.  Nothing involving taxes is simple.  But there is something about taxes that makes the sanest of people a little crazy.  We can’t seem to evaluate it in the same way that we do other expenses.

We’ll go to great lengths to lower our tax bill, even to our detriment.  Paying more taxes can be a good thing, if the after-tax result is more money in your pocket.  If you want to build your wealth, the net amount after taxes is the only number that matters.

There are ways to minimize the taxes you pay.  I encourage you to learn about them.  Some strategies eliminate taxes while other strategies defer what you owe to a later date.  But whatever strategy you use, don’t lose sight of the goal – real money you can take to the bank.

Eliminating Taxes

Eliminating taxes is good.  But it isn’t as simple as that.  You may get a deduction for interest you pay on your mortgage, but you still paid that interest with real money.  And the amount of benefit you receive depends on a number of other factors, such as your gross income and other deductions.  If you are thinking only about the tax savings it’s easy to overspend on housing.

The same applies to any kind of deduction.  Spending a $1.00 to save $0.20 doesn’t help you build wealth……….unless that $1.00 helps you make more dollars.  The focus should always be using that $1.00 in the most effective way you can to generate real after-tax profit.

Deferring Taxes

Deferring taxes can be good too but a bit trickier.  It is generally assumed that paying for something later is better than paying it now, all other things being equal.  The problem is that all things are never equal.  We can’t know what the real value of the deferral will be until the end.

Tax law is constantly changing.  Rates and deductions are never fixed.  The amazing strategy you develop today can be undone with a stroke of a pen.

Cost vs Benefit Received

Time, money and energy spent implementing and maintaining a tax strategy needs to be factored into the equation.  The benefits need to outweigh the cost.  Don’t forget about opportunity cost.  The time money and energy you spend on tax strategy can’t be spent on making more money.  Which has more value?

Focus on saving taxes has limitations.  You can get your taxes down to zero.  But if you aren’t careful you will spend too much money, time and effort for too small of a payoff.

If your goal is to build long-term sustainable wealth, manage taxes like you do all expenses.  But focus on the bottom line – real money you can take to the bank and keep.

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